Petition for Writ of Certiorari — Devon Energy Energy Corp. v. Salazar (No. 08-1404)

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IN THE

Supreme Court of the Anited States

DEVON ENERGY CORPORATION,

Petitioner,

Vv.

KENNETH L. SALAZAR,

SECRETARY OF THE INTERIOR,

Respondent.

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

PETITION FOR A WRIT OF CERTIORARI

Of Counsel: STEVEN J. ROSENBAUM

MARK B. MCDANIEL Counsel of Record

ANDREA S. MILES Kk. EDWARD BRUCE

Devon Energy Corporation JAMES P. SULLIVAN

20 North Broadway COVINGTON & BURLING LLP

Oklahoma City, OK 73102 1201 Pennsylvania Ave., NW

Washington, DC 20004

(202) 662-5568

Counsel for Petitioner

May 2009

QUESTIONS PRESENTED

1. Whether a federal agency that has given its

regulation a definitive interpretation must engage in

notice-and-comment rulemaking pursuant to the

Administrative Procedure Act to reverse that

interpretation, where the initial interpretation has

been followed for many years and set forth in

mandatory instructions to regulated entities.

2. Whether a federal agency that changes its

interpretation of its own regulation may _ give

retroactive effect to the new interpretation.

PARTIES TO THE PROCEEDING

AND RULE 29.6 DISCLOSURE

Petitioner, plaintiff below, is Devon Energy

Corporation. Petitioner has no parent company, and

no publicly held company owns ten percent or more

of its stock.

Respondent is Kenneth L. Salazar, who is sued

in his capacity as Secretary of the United States

Department of the Interior. His predecessors Gale A.

Norton and Dirk Kempthorne were likewise sued

below in their capacities as Secretary of the Interior.

TABLE OF CONTENTS

Page

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PARTIES TO THE PROCEEDING AND

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CONSTITUTIONAL AND STATUTORY

PROVISIONS INVOLVED .........c0csccescseccssoccess 1

STATEMENT OF THEE CASE oenccscsciccccoseessscscesences sense 3

REASONS FOR GRANTING THE PETITION ......... 9

: The Circuits Are Divided Over Whether

An Agency Must Use Notice-And-

Comment Procedures To Change Its

Interpretation Of A Regulation............0..00.0.00.. 9

IT. Retroactive Application Of The Agency’s

Changed Interpretation Of Its Regulation

Cannot Be Reconciled With This Cuurt’s

NRTA ER AU OEE RRR ee 19

CPO EI OE ids caclasitcricetecanc nae ee 23

Appendix A — Devon Energy Corp. v.

Kempthorne, 551 F.3d 1030 (D.C. Cir. 2008)...... la

Appendix B — Devon Energy Corp. v. Norton,

No. 04-CV-0821 (D.D.C. Aug. 23, 2007)

(order and memorandum opinion).................... 24a

Appendix C — Dep't of the Interior, Final Order

to Perform Restructured Accounting and

Pay Additional Royalties (Mar. 19, 2004) ...... é

Appendix D — Devon Energy Corp. v.

Kempthorne, No. 07-5299 (D.C. Cir. Feb.

13, 2009) (order denying rehearing en banc)...

Appendix E — Letter from Robert E. Brown,

Acting Associate Director for Royalty

Management, Minerals Management

Service, to Operator/Payor (Apr. 22, 1996).....

62a

63a

TABLE OF AUTHORITIES

Page(s)

CASES

Alaska Professional Hunters Ass’n v. FAA,

177 F.3d 1030 (D.C. Cir. 1999)..................4 passim

Amoco Prod. Co. v. United States,

410 F.3d 722 (D.C. Cir. 2005) .0..000-ccccccccccceeeee 7, 16

Appalachian Power Co. v. EPA,

S06 FS 1616 C).C. Cit. ZOO) ...00....0..0cocececsccerecs 18

Bowen v. Georgetown Univ. Hosp.,

BR Tee 0 nk kkk dsncedccavscinsvescscvicees 20, 21, 22

Caruso v. Blockbuster-Sony Music Entm’t Ctr.,

L7G He BG Ce Ce. TDD vsinvesinsesccccecceceseccsese.: 15

Chevron U.S.A., Inc. v. Natural Res. Def.

Council, Inc., 467 U.S. 837 (1984) ..............00...05. 21

Chief Probation Officers v. Shalala,

BE Fe Bey Ce Gh, BF vcteikvnccecscavesscsavscecece 14

Chrysler Corp. v. Brown,

Be ee ee OD a civineesktbceicandscicncssiacvexdicvoononnacs 10

Cmty. Nutrition Inst. v. Young,

816 F.26 O43 G).C. Cir. 1OB7Z) ..........cccccccseceveseress 10

Dismas Charities, Inc. v. DOd,

SOT F.Bel GEG TG Civ. FIO) «0c... cccccscevecccccesscere 14

Envtl. Integrity Project v. EPA,

OSS Fer Be FE... Cie. BOG) onc cccccccccccesecscscecess 16

Erringer v. Thompson,

STi F.Bek GEG CO Civ: 2004) ......2..ccccccccccccsccssccnes: 14

FCC vy. Fox Television Stations, Inc.,

No. 07-582, shp op. (U.S. Apr. 28, 2009)............ 22

Geier v. Am. Honda Motor Co.,

ee ee I go isc cusivnssnvcsseniansnvesvaenencyes 15

Gen. Elec. Co. v. EPA,

VD” Be Le OR at - ) r rie 18

Indep. Petroleum Ass’n v. Babbitt,

OF Fe LAGS CIC. Gib. TRB) vvcsesescsccceccsscscsccceses 16

Kaiser Aluminum & Chem. Corp. v. Bonjorno,

ee ass ccc cuuseousxesadsrvasvacsnverieravens 20

Landgraf v. USI Film Prods.,

ee ee Ne FN cakes ainccccasnsccscedencescivens 20, 22, 23

Long Island Care at Home, Ltd. v. Coke,

551 U.S. 158, 127 S. Ct. 2339 (2007).................. 21

Met West Inc. v. Sec’y of Labor,

SO0 F.36 BOG (D.C. Cir. ZOD) ........ccccccessvcceserccess 16

NLRB v. Wyman-Gordon Co.,

ee a. cs sxeeshsaveusnscsskeveveseonnsees 10

Nat'l Treasury Employees Union v. Weise,

BE Fe BOE CRP. GiB. BOD occ scsccccsscasscsscecercoese 10

Paragon Health Network, Inc. v. Thompsc»,

BE ee EUGE CFOR RlE, BD ccacececdsssceemsncessesses 11

Paralyzed Veterans v. D.C. Arena L.P.,

BEF Bie Oe CA, Cit. TOBE) ovececccccscsccseseces passim

SBC Inc. v. FCC,

OE4 F.38 606 3d Cir. BO06) .........00.c0s0cc00cce8000000, 14

Shalala v. Guernsey Mem'l Hosp..,

a acpunvbdubockane¥ecebveases 11

Shell Offshore Inc. v. Babbitt,

S36 F.0G Gas (Oth Cir. BOO1)..........0.0000ec00005 passim

Smiley v. Citibank (S.D.), N.A.,

le BUR Bs 2! Ee 1G, 21, 22

Torch Operating Co. v. Babbitt,

172 F. Supp. 2d 113 (D.D.C. 2001) ...ccccececececeeee. 17

United States v. Chrysler Corp.,

158 F.3e 13560 (D.C. Cir. 19008) .......cccccccoscscvcscess 13

Warder v. Shalala,

8 ge” ee Fa” SS). | 14

STATUTES

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Se er I elles rs ea pu ndehausnsereuuduancnbaene passim

er IIE oo cincsvnis so ceeshssaveeunencecespacave coecewuaens 10

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SIE, RS oud a junaina saconbasnaduiacume dae

Se i sa licss cuiondicphe esas cayanwatadoenesestaecniwes 1

EE ge iss a pews ee caasasahansceeaianaiie Gieiie 3

eS res Occ cr eusueueasaceceueanieercete 3

ee ee MED cis saeco bndecenisichinsareobindadentedebeceriencevaemeain 3

OTHER AUTHORITIES

Be ee ee Dida cn necanasahadsivicsoratsaeavesisenninvecias 5

5S Fea. Reg. 1290 Wan. 15, LOBS)......ccccccccccscscserceesass 4

Dep't of the Interior, 218 Departmental

PTHUE 1. CY BO, LO ce veccnrcecesesscocccesccseccessees 4

Dep't of the Interior, 218 Departmental

pe ae ee ae | ere 4

Minerals Mgmt. Serv., 200 Service Manual 1.4A

I gos ies carlos restanaeenenienebaddicinnarsasaleus 4

Minerals Mgmt. Serv., 220 Service Manual 1.5

I tN i adel a tauageostansde 4

RICHARD J. PIERCE, JR., ADMINISTRATIVE LAW

TREATISE (4th ed. Supp. 2009).........cccccscocscrceceese 12

PETER L. STRAUSS ET AL., GELLHORN AND BYSE’S

ADMINISTRATIVE LAW (10th ed. rev. 2003) ......... 13

John F. Manning, Nonlegislative Rules,

72 GEO. WASH. L. REV. 893 (2004) ............ eas 10

]

PETITION FOR A WRIT OF CERTIORARI

Petitioner Devon Energy Corporation (“Devon”)

respectfully requests that a writ of certiorari issue to

review the judgment of the United States Court of

Appeals for the District of Columbia Circuit in this

case.

OPINION BELOW

The opinion of the D.C. Circuit (Pet. App. la-—

23a) is reported at 551 F.3d 1030. The opinion of the

United States District Court for the District of

Columbia (Pet. App. 24a—-40a), which was

unreported, is available at 2007 WL 2422005.

JURISDICTION

The decision of the D.C. Circuit was entered on

December 23, 2008. A timely petition for rehearing

and rehearing en banc was denied on February 13,

2009. (Pet. App. 62a.) This Court’s jurisdiction rests

on 28 U.S.C. § 1254(1). The court of appeals had

jurisdiction pursuant to 28 U.S.C. §1291. The

district court had jurisdiction pursuant to 28 U.S.C.

§ 1331.

CONSTITUTIONAL AND STATUTORY

PROVISIONS INVOLVED

The Administrative Procedure Act provides in

relevant part as follows:

(b) General notice of proposed rule making

shall be published in the Federal Register, unless

persons subject thereto are named and either

personally served or otherwise have actual notice

thereof in accordance with law. The notice shall

include—

(1) a statement of the time, place, and nature

of public rule making proceedings;

(2) reference to the legal authority under

which the rule is proposed; and

(3) either the terms or substance of the

proposed rule or a description of the subjects

and issues involved.

Except when notice or hearing is required by

statute, this subsection does not apply—

(A) to interpretative rules, general]

statements of policy, or rules of agency

organization, procedure, or practice; or

(B) when the agency for good cause finds

(and incorporates the finding and a brief

statement of reasons therefor in the rules

issued) that notice and public procedure

thereon are impracticable, unnecessary, or

contrary to the public interest.

agency shall give interested persons = an

opportunity to participate in the rule making

through submission of written data, views, or

arguments with or without opportunity for oral

presentation. After consideration of the relevant

matter presented, the agency shall incorporate in

the rules adopted a concise general statement of

their basis and _ purpose. When rules are

required by statute to be made on the record

after opportunity for an agency hearing, sections

556 and 557 of this title apply instead of this

subsection.

5 U.S.C. § 553(b)—-(c).

STATEMENT OF THE CASE

This case addresses a royalty dispute involving

hundreds of millions of dollars and presenting a

fundamental question of administrative law that has

divided the courts of appeals.

Pursuant to the Minerals Leasing Act, 30 U.S.C.

§ 181 et seq. (“the Act”), the Secretary of the United

States Department of the Interior (“DOI”) issues and

administers leases to private entities authorizing the

production and sale of various minerals from federal

lands, including natural gas. Under the Act, the

lessee must pay “a royaliy at a rate of not less than

12.5 percent in amount or value of the production

removed or sold from the lease.” Jd. § 226(b)(1)(A).

The regulations at issue in this case govern the

calculation of such royalties.

Congress has given the Secretary the authority

“to prescribe necessary and proper rules and

regulations and to do any and all things necessary to

carry out and accomplish the purposes of [the Act].”

Id. § 189. During the period relevant to this

litigation, the Secretary had formally delegated his

authority over royalty collection to the Director of

DOI’s Minerals Management Service (“MMS").' The

Director, in turn, had redelegated this authority to

the Associate Director for Royalty Management.:

MMS defined “authority” to mean “[t]he ability to

make the final, binding decision anWor take specific

action as an Official representing the U.S.

Government.’ Consistent with the foregoing

delegations, the relevant regulations relating to

royalty issues were promulgated by MMS, and not by

the DOI Secretary or Assistant Secretary. See, e.g.,

Final Rule, Revision of Gas Royalty Valuation

Regulations and Related Topics, 53 Fed. Reg. 1230

(Jan. 15, 1988).

In 1988, MMS promulgated gas royalty valuation

regulations providing that costs incurred by a lessee

! Dep't of the Interior, 218 Departmental Manual 1.1 (May 26,

1983) (“lhe Durector, Minerals Management Service, is

authorized to exercise the Secretary's authority to establish a

comprehensive Royalty Management System which ensures

that the Government is paid timely and in full for the leasing of

all mineral lands and for its contractual royalty shares, rentals,

bonuses, and other fees for minerals extracted by lessees... .”)

Cf. Dep't of the Interior, 218 Departmental Manual 1.1 (Aug

29, 2002), available at http://206.131.241.18/app_dm/act_

getfiles.cfm?relnum=3524.

2 Minerals Mgmt. Serv., 220 Service Manual 1.5 (Aug. 29, 1991)

(“(T|he authorities delegated to the Director in 218 DM 1 for

managing and administering the Royalty Management

Program are redclegated to the Associate Director for Royalty

Management. ... The Director retains the authority to

[a]pprove rules and publish in the Federal Register.”)

3 Minerals Mgmt. Serv., 200 Service Manual 1.4A (July 20, 1983)

in rendering its gas marketable are not deducted

from the gross value of the gus against which royalty

obligations are calculated, 30 C.F.R. §§ 206.152(i),

206.153(1) (1988), but that costs of transporting the

gas are deducted, td. §§ 206.156, 206.157. (Pet. App.

4a-—5a.) After establishing this so-called “marketable

condition rule,” MMS faced “many questions ... on

how to report and pay royalties on coalbed methane,”

(Pet. App. 63a), a resource that accounts for roughly

10% of total domestic natural gas reserves.

MMS referred these questions regarding coalbed

methane gas to its Royalty Policy Board, which MMS

“established to develop royalty program policy,” and

to act as a “decision making body to review, discuss,

evaluate and decide policy decisions on proposals

aimed at improving the [Royalty Management

Program].”’ (C.A. App. 100.) The Board consisted of

the MMS Deputy Director, the Associate Director for

Royalty Management, and the Associate Director for

Policy and Management Improvement. (/d. at 101.)

Among other questions, the Board addressed the

proper treatment of the costs of dehydrating and

compressing coalbed methane gas. After considering

applicable legal authorities and agency precedents,

the Board concluded that lessees should be allowed

to deduct, as part of their transportation allowance,

their dehydration and compression costs incurred

downstream of the approved royalty measurement

point. (dd. at 104—05.) The Board recommended that

detailed instructions concerning these decisions be

given to all affected parties. In response, the MMS

Deputy Director issued two official statements

containing the agency's instructions for valuing and

reporting royalties: “Coalbed Methane Valuation and

Reporting Guidelines” dated December 7, 1995, and

the more generally applicable “Compression

Guidance” dated December 8, 1995. (Pet. App. 7a.)

These guidance documents reflected the conclusion

that dehydration and compression costs could be

deducted from the royalty base as transportation

costs. (/d. at 7a—8a.)

The MMS Associate Director for Royalty

Management (to whom the Secretary’s authority had

been redelegated) subsequently sent an April 22,

1996 “Dear Operator/Payor” letter to every federal

lease operator and royalty payor in the United

States. (id. at 63a—68a.) That letter set forth

guidelines that each lessee was required to follow ii

calculating royalties. In the words of the April 22,

1996 letter, a payor “must follow these guidelines to

ensure proper payment of royalties and correct

reporting of production.” (dd. at 63a (emphasis

added).) The mandatory nature of these instructions

was repeatedly emphasized throughout’ the

document. (See id. at 63a—68a (“you must value,”

“you must add,” “you must determine,” “you cannot

deduct,” “you must ensure,” “you must use,” “you

cannot include,” “you must convert,” “you cannot

take,” “you must report”).) With respect to

allowances for the costs of dehydration and

compression of coalbed methane gas, the letter

provided,

You can include costs of dehydration

occurring after metering at the _ royalty

measurement point in your transportation

allowance but you cannot deduct costs of

dehydration occurring at the wellhead. You

can include costs for compression occurring

downstream of the royalty measurement

point, to the extent the compression is

necessary for transportation.

(Id. at 66a.)

Petitioner is a natural gas producer with leases

in various parts of the country, including the Powder

River Basin of Wyoming, an area with significant

coalbed methane gas reserves. From the issuance of

the “Dear Operator/Payor” letter on April 22, 1996

through 2003 — a period of seven years — Petitioner

consistently abided by MMS’s __ requirements

regarding the treatment of dehydration and

compression costs in calculating royalties due the

United States. Insofar as Petitioner is aware, the

same was true for the rest of the affected industry.4

In 2001, a royalty dispute arose between

Petitioner and the State of Wyoming, which has

certain audit rights because it receives a share of

royalties, over whether Petitioner was entitled to

deduct any transportation costs in calculating

4 A legal dispute did arise between some producers and MMS

over a separate provision in the April 22, 1996 letter providing

for the non-deductibility of the costs of removing excess carbon

dioxide from coalbed methane gas. MMS prevailed in that

litigation. See Amoco Prod. Co. v. United States, 410 F.3d 722

(D.C. Cir. 2005) (Roberts, J.), aff'd on other grounds sub. nom.

BP Am. Prod. Co. v. Burton, 549 U.S. 84 (2006).

royaities. The State contended that deductible

transportation costs did not commence until the

point along the transportation route at which

Petitioner had made its gas marketable through

removal of excess carbon dioxide. Petitioner

accordingly sought from MMS a determination that

it was correctly calculating its royalty obligations.

MMS decided in Petitioner’s favor on the issue

raised by the State of Wyoming. (C.A. App. 57, 92.)

However, in decisions issued in October 2003 and

March 2004, the DOI Assistant Secretary ruled that

Petitioner could not deduct post-royalty

measurement point dehydration and compression

costs as part of its transportation allowance. (Pet.

App. 9a—10a.) The Assistant Secretary asserted that

the guidance reflected in the April 22, 1996 letter

from the MMS Associate Director for Royalty

Management, which had been provided to Petitioner

and all other lessees, was “based on a mistaken

perception,” and that the interpretations expressed

therein were “errors” by “subordinate [DOJ] officials”

that were “inconsistent with or misinterpreted the

marketable condition rule itself.” (C.A. App. 54, 85.)

The Assistant Secretary gave retroactive effect to his

new interpretation of MMS’s marketable condition

rule, demanding that Petitioner recalculate its

royalties “from the period beginning when Devon

began paying royalties to the Minerals Management

Service on the coalbed methane produced from the

Federal leases ... to the present,” (id. at 55; Pet.

App. 10a), even though Devon was required during

this period to comply with the April 22, 1996 letter.

Petitioner sought judicial review in the United

States District Court for the District of Columbia,

arguing, inter alia, that MMS’s reinterpretation of

its regulations was invalid for failure to observe the

procedural requirements of 5 U.S.C. § 553. The

district court denied Petitioner’s motion for summary

judgment and granted Respondent’s cross-motion for

summary Judgment. (Pet. App. 24a.) The United

States Court of Appeals for the District of Columbia

Circuit affirmed, concluding that although “Devon’s

preferred interpretation of the [marketable

condition] rule is not unreasonable,” (id. at 13a), the

agency’s 20083 interpretation prohibiting deduction of

dehydration and compression costs was not at odds

with the plain language of the regulations, (id. at

12a—14a). The court of appeals also rejected

Petitioners argument under 5 U.S.C. § 553,

reasoning that the officials responsible iss the

guidance documents and the April 22, 1996 letter

lacked the authority to bind MMS tto the

interpretations there expressed. (/d. at 15a—23a.)

REASONS FOR GRANTING THE PETITION

I. The Circuits Are Divided Over Whether An

Agency Must Use Notice-And-Comment

Procedures To Change Its Interpretation Of

A Regulation.

This case poses an unsettled question concerning

the requirements for rulemaking under’ the

Administrative Procedure Act, 5 U.S.C. § 551 et seq.

To promulgate a valid “rule,” td. § 551(4), an agency

must follow the APA’s familiar notice-and-comment

procedures by publishing a notice of proposed

rulemaking, providing an opportunity for comment,

and issuing a “concise general statement of [the

rule’s] basis and purpose,” id. § 553(b)—(c). The APA

imposes this measure of procedural formality “to

assure due deliberation,’ Smiley v. Citibank (S.D.),

N.A., 517 U.S. 7385, 741 (1996), and “to assure

fairness and mature consideration of rules of general

application,” NLRB v. Wyman-Gordon Co., 394 U.S.

759, 764 (1969) (plurality opinion). Under the APA’s

judicial review provision, 5 U.S.C. § 706(2)(D), a

court must set aside as unlawful any agency rule

that is not the product of such notice-and-comment

procedures. See Chrysler Corp. v. Brown, 441 U.S.

281, 313 (1979).

Among other exceptions to the notice-and-

comment requirement, the APA provides that an

agency need not observe such formality when it

makes “interpretative rules.” 5 U.S.C. § 553(b)(A).

Distinguishing the interpretative rules that are

exempt from the notice-and-comment requirement

from the legislative rules® that are not is among the

great challenges in administrative law. See, e.g.,

5 The term “legislative rules,” which does not appear in the

APA, refers to agency documents subject to the notice-and-

comment requirement and capable of binding with the force of

statutes. See John F. Manning, Nonlegislative Rules, 72 GEO.

WASH. L. REV. 893, 893,931 n.191 (2004). This Petition adopts

the common practice of using the words “rule” and “regulation”

interchangeably. See Nat'l Treasury Employees Union v. Weise,

100 F.3d 157, 160 (D.C. Cir. 1996).

Cmty. Nutrition Inst. v. Young, 818 F.2d 943, 946

(D.C. Cir. 1987) (per curiam) (collecting sources

describing this distinction as “tenuous,” “fuzzy,”

“blurred,” “baffling,” and “enshrouded in

considerable smog’).

It is settled that a purportedly interpretative

rule that amends a prior legislative ruie must be

promulgated pursuant to notice-and-comment

procedures. See Shalala v. Guernsey Mem Hosp.,

514 U.S. 87, 100 (1995). But when an agency

promulgates a legislative rule, then issues an

interpretative rule construing the legislative rule,

and subsequently issues a contrary interpretative

rule, the agency has also engaged in rulemaking by

amending an earlier interpretative rule. See 5

U.S.C. § 551(5) (“ ‘rule making’ means agency process

for formulating, amending, or repealing a rule’).

This scenario describes the facts of Petitioner's case,

and presents the question of what requirements the

APA imposes on an agency when it reinterprets its

own regulations.

1. The courts of appeals are divided on the

question of what procedure an agency must observe

in contradicting a prior’ interpretative’ rule

construing its own legislative rule. See, e.g., Paragon

Health Network, Inc. v. Thompson, 251 F.3d 1141,

1148 n.4 (7th Cir. 2001) (noting this split as between

the D.C. Cireuit and the First Circuit). The D.C.

Circuit in prior decisions, along with the Third

Circuit, Fifth Circuit, and Sixth Circuit, have all

required notice and comment in this scenario. The

First Circuit and Ninth Circuit have not.

This mature division of authority on an

important issue of administrative law merits review

in this Court. See RICHARD J. PIERCE, JR.,

ADMINISTRATIVE LAW TREATISE § 6.4, at 131 (4th ed.

Supp. 2009) (“The circuit split on this issue has now

increased, with more circuits choosing sides.

The Supreme Court should resolve this difference of

opinion with respect to an important question that

arises virtually every day at agencies.”).

The division among the circuits can be traced to

the leading case of Paralyzed Veterans v. D.C. Arena

L.P., 117 F.3d 579 (D.C. Cir. 1997). In that case, the

D.C. Circuit considered a Department of Justice

(“DOJ”) regulation providing that wheelchair areas

in facilities subject to the Americans’ with

Disabilities Act must enjoy “lines of sight comparable

to those for members of the general public.” Jd. at

580-81. The litigants disputed whether the

regulation obliged a stadium owner to account for

standing spectators in providing such lines of sight.

The agency’s interpretation of its own legislative rule

had changed over time: A DOJ official said in a 1992

speech that the regulation did not require any

attention to standing spectators, but a DOJ technical

manual issued in 1994 was to the contrary. Id. at

581-82.

Addressing the question whether DOJ should

have used _ notice-and-comment’¥ procedures_ to

promulgate the manual, the D.C. Circuit agreed that

“folnce an agency” gives its regulation = an

interpretation, it can only change that interpretation

as it would formally modify the regulation itself:

through the process of notice and comment

rulemaking.” Jd. at 586. Having announced this

“one bite at the interpretational apple” standard,

PETER L. STRAUSS ET AL., GELLHORN AND BYSE’S

ADMINISTRATIVE LAW 716 (10th ed. rev. 2003), the

Paralyzed Veterans court declined to invalidate the

DOJ manual because the speech by a mid-level

official did not reflect a definitive agency

interpretation of its regulation, 117 F.3d at 587.

The D.C. Circuit first used the Paralyzed

Veterans principle to set aside an agency rule in

Alaska Professional Hunters Ass’n v. FAA, 177 F.3d

1030 (D.C. Cir. 1999). A legislative rule of the FAA

required “commercial operator{|s]” of airplanes to

abide by certain safety standards. /d. at 1031--32.

Alaskan hunting guides challenged an FAA Notice to

Operators, promulgated without notice and

comment, compelling the guides for the first time in

decades to follow the “commercial operator” safety

standards when using small aircraft to transport

customers. Jd.

The D.C. Cireuit found that the Notice’s

interpretation of the legislative rule contradicted the

FAA’s prior interpretation, as embodied in thirty-five

years of consistent but unwritten advice from the

FAA’s Alaska Region to the regulated hunting guides

that they were not “commercial operator[s].” Jd. at

1033-35. Accordingly, the court set aside the Notice

under Paralyzed Veterans due to the FAA’s failure to

use notice-and-comment procedures. /d. at 1036.

The Alaska Professional Hunters court restated the

Paralyzed Veterans principle as follows: “When an

agency has given its regulation a_ definitive

interpretation, and later significantly revises that

interpretation, the agency has in effect amended its

rule, something it may not accomplish without notice

and comment.” /d. at 1034.

The D.C. Circuit’s Paralyzed Veterans principle

has been embraced by other courts of appeals. The

Third Circuit recognizes that “if an agency’s present

interpretation of a regulation is a fundamental

modification of a previous interpretation, the

modification can only be made in accordance with the

notice and comment requirements of the APA.” SBC

Inc. v. FCC, 414 F.3d 486, 498 (3d Cir. 2005) (citing

Paralyzed Veterans). The Fifth Circuit “agree[s] with

the reasoning of the D.C. Circuit [and holds that] the

APA requires an agency to provide an opportunity

for notice and comment before substantially altering

a well established regulatory interpretation.” Shell

Offshore Inc. v. Babbitt, 238 F.3d 622, 629 (5th Cir.

2001) (citing Paralyzed Veterans and Alaska

Professional Hunters). The Sixth Circuit likewise

concludes “that once an agency gives a regulation an

interpretation, notice and comment will often be

required before the interpretation of that regulation

can be changed.” Dismas Charities, Inc. v. DOJ, 401

F.3d 666, 682 (6th Cir. 2005) (citing Alaska

Professional Hunters).

The First Circuit and the Ninth Circuit, on the

other hand, have rejected the Paralyzed Veterans

principle. See Warder v. Shalala, 149 F.3d 73, 81—82

(1st Cir. 1998); Erringer v. Thompson, 371 F.>d 625,

632 (9th Cir. 2004) (“{[N}Jo notice and comment

rulemaking is required to amend a_ previous

interpretive rule.”); Chief Probation Officers v.

Shalala, 118 F.3d 1327, 1337 (9th Cir. 1997) (White,

Retired Justice, sitting by designation) (“If an agency

maintains that a rule, not held out as having the

force of law, is mandated by statute, it will be

legislative ... only if it is inconsistent with an

existing regulation. In other words, the rule would

have to be inconsistent with another rule having the

force of law, not just any agency interpretation

regardless of whether it had been codified.”) (citation

omitted).

In addition to the attention it has received in the

courts of appeals, the Paralyzed Veterans principle

has garnered favorable mention from members of

this Court. Justice Stevens, in a dissent joined by

Justices Souter, Thomas, and Ginsburg, has

referenced “the APA’s’” requirement of new

rulemaking when an agency substantially modifies

its interpretation of a regulation.” Geter v. Am.

Honda Motor Co., 529 U.S. 861, 912 (2000) (Stevens,

J., dissenting) (citing Paralyzed Veterans). Justice

Alito, writing for the Third Circuit as a member of

that court, applied the Paralyzed Veterans principle

in vacating an agency’s rule. Caruso v. Blockbuster-

Sony Music Entm’t Ctr., 174 F.3d 166, 175—77 (3d

Cir. 1999) (citing Paraiyzed Veterans), vacated, 193

F.3d 730 (3d Cir. 1999). This important issue of

administrative law, which has divided the courts of

appeals, is now worthy of the full Court’s attention.

2. In applying its circuit-splitting Paralyzed

Veterans principle to the facts of Petitioner’s case,

the D.C. Circuit has created a further division among

those courts that recognize the principle. The

decision below squarely conflicts with Shell Offshore

Inc. v. Babbitt, 238 F.3d 622 (5th Cir. 2001), another

case involving MMS’s contradictory interpretations

of its royalty-calculation regulations. The result is a

three-way split between circuits that reject the

Paralyzed Veterans principle, circuits that apply the

principle narrowly, and circuits that apply it broadly.

The D.C. Circuit continues to employ the

Paralyzed Veterans. principle when _ agencies

reinterpret their own legislative rules without using

notice-and-comment procedures. See, e.g., MetWest

Inc. v. Sec’y of Labor, 560 F.3d 506, 509-11 (D.C. Cir.

2009); Envtl. Integrity Project v. EPA, 425 F.3d 992,

997-98 (D.C. Cir. 2005). But the D.C. Circuit has

now diverged from a sister circuit in its application of

the principle. The decision below held that MMS

was not required to use notice and comment to

promulgate its 2003 interpretation of the market

condition rule because the contrary interpretation

reflected in various guidance documents, as well as

the agency’s consistent practice over a seven-year

period, purportedly did not constitute a _ binding

agency interpretation.®

6 (See Pet. App. 17a 20a (citing Amoco Prod, Co. v. Watson, 410

F.3d 722, 725 (D.C. Cir. 2005) (Roberts, J.), and Indep.

Petroleum Ass'n v. Babbitt, 92 F.3d 1248, 1256—57 (D.C. Cir

1996), for the proposition that the MMS documents at issue in

this case did not bind the agency).) The delegations of

authority previously described, supra at 3-4, were not

discussed in Amoco or Independent Petroleum, presumably

because they were not raised by the parties in those cases.

The Fifth Circuit reached the opposite conclusion

in Shell, on facts less favorable to the regulated

entity. Shell involved an MMS regulation providing

that an “approved” FERC tariff could be used as the

cost of transporting crude oil for purposes of

calculating royalty payments due the United States.

For five years, MMS had followed an unwritten but

consistent practice of treating tariffs filed with FERC

as having been approved by FERC, and thus

allowable for purposes of royalty calculations,

regardless whether FERC had affirmatively

approved the tariff. 238 F. 3d at 624-26. MMS then

purported to change its interpretation to require

affirmative FERC approval. /d. at 628—29.

Relying on Alaska Professional Hunters and

Paralyzed Veterans, the Fifth Circuit held that MMS

was obliged to use notice-and-comment procedures in

promulgating its amended interpretation. Id. at

629-30; see also Torch Operating Co. v. Babbitt, 172

F. Supp. 2d 113, 124-28 (D.D.C. 2001) (following

Shell in a factually similar case).

The conflict between the D.C. Circuit and the

Fifth Circuit is clear. The Fifth Circuit held that a

five-year period of MMS practice, unaccompanied by

any written guidance from the agency, was

sufficiently authoritative to warrant notice-and-

comment procedures under Paralyzed Veterans.

Shell, 238 F.3d at 628-29 (“([T]he new ‘rule’ that

Shell asserts violates the APA is not a change from a

written policy statement or regulation. Rather, it is

an alteration of an existing practice.”). The D.C.

Circuit, by contrast, held that a seven-year period of

MMS practice, even when combined with written

pronouncements by agency officials, was _ not

authoritative and therefore did not demand notice-

and-comment procedures under Paralyzed Veterans.

(Pet. App. 17a—20a.).

One might expect the opposite result in this pair

of cases — if the facts of Shell support notice-and-

comment rulemaking, Petitioner’s facts should make

for an even stronger case under Alaska Professional

Hunters and Paralyzed Veterans. In addition to the

seven-year period of consistent agency practice,

Petitioner could also point to written agency

instructions couched in unmistakably mandatory

language. Cf. Gen. Elec. Co. v. EPA, 290 F.3d 377,

384 (D.C. Cir. 2002) (“To the applicant reading the

Guidance Document the message is clear: in

reviewing applications the Agency will not be open to

considering approaches other than those prescribed

in the Document.”); Appalachian Power Co. v. EPA,

208 F.3d 1015, 1023 (D.C. Cir. 2000) (“[T]he entire

Guidance, from beginning to end — except the last

paragraph — reads like a ukase. It commands, it

requires, it orders, it dictates.”); United States v.

Chrysler Corp., 158 F.3d 1350, 1356 (D.C. Cir. 1998)

(“[A]n agency is hard pressed to show fair notice

when the agency itself has taken action in the past

that conflicts with its current interpretation of a

regulation.”). It appears MMS’s procedural

obligations under the APA vary according to the

forum in which judicial review is sought.

Juxtaposition of Shell with the decision below

shows that the D.C. Circuit has aggravated the

Paralyzed Veterans controversy into a three-way

circuit split. In some circuits, Itke the First Circuit

and the Ninth Circuit, an agency is always at liberty

to reinterpret its legislative rules without notice and

comment. In the D.C. Circuit, the agency’s

interpretive freedom depends on the authorship of its

written interpretations. Meanwhile, in the Fifth

Circuit, an agency is bound by the interpretations

reflected in its consistent practice, regardless

whether such interpretations have been reduced to

written form.

ne * *

As shown above, the courts of appeals are divided

on whether the Paralyzed Veterans principle is good

law and, if so, on how to employ it when an agency

takes more than one bite at the interpretational

apple. Such a division of authority leaves agencies

uncertain about the necessary level of procedural

formality, and deprives’ regulated parties of

information about applicable regulations that they

might otherwise use in structuring their affairs. The

conflicting decisions of the courts of appeals on this

important question of administrative law can only be

harmonized by a decision from this Court.

II. Retroactive Application Of The Agency’s

Changed Interpretation Of Its Regulation

Cannot Be Reconciled With This Court’s

Precedent.

The court of appeals upheld an MMS rule

“requiring Devon retroactively to recalculate royalties

owed to the Government.” (Pet. App. 2a (emphasis

added).) In so doing, the decision below ran afoul of

the strong anti-retroactivity principle reflected in the

decisions of this Court. Review is warranted to

address this departure from precedent.

’

“Retroactivity is not favored in the law,” and so

in the absence of express statutory authorization, an

administrative agency lacks the power to engage in

retroactive rulemaking. Bowen v. Georgetown Univ.

Hosp., 488 U.S. 204, 208 (1988). The presumption

against retroactive legislation, by Congress and by

the agencies to which it delegates authority, has

constitutional underpinnings and a long pedigree.

See, e.g., Landgraf v. USI Film Prods., 511 U.S. 244,

266, 286 (1994) (describing expression of the

“presumption against statutory retroactivity” in the

Constitution’s Ex Post Facto, Contracts, Takings,

Attainder, and Due Process Clauses); Kaiser

Aluminum & Chem. Corp. v. Bonjorno, 494 U.S. 827,

855 (1990) (Scalia, J., concurring) (“The principle

that the legal effect of conduct should ordinarily be

assessed under the law that existed when the

conduct took place has timeless and_ universal

human appeal.”). The APA lends further support to

the presumption against retroactivity in the

administrative law context. See Bowen, 488 U.S. at

224 (Scalia, J., concurring).

In this case, MMS gave its regulations a new

interpretation in 2003 and compelled Petitioner to

recalculate previously incurred royalties, which had

already been calculated in accordance with the

agency's existing interpretation. (Pet. App. 10a; C.A.

App. 55.) At the time Petitioner incurred its royalty

obligations, MMS allowed lessees to deduct certain

compression and dehydration costs from the royalty

base for coalbed methane gas. MMS turned back the

clock and demanded additional payment based on a

royalty base from which compression’ and

dehydration costs had not been deducted.

This case thus poses the question identified but

left unresolved in Smiley v. Citibank (S.D.), N.A.,

517 U.S. 735, 744 n.3 (1996). In Smiley, a case

involving deference to an agency’s interpretation of a

statute under Chevron U.S.A., Inc. v. Natural

Resources Defense Council, Inc., 467 U.S. 837 (1984),

a party argued “that deferring to the regulation in

this case involving antecedent transactions would

make the regulation retroactive, in violation of

[Bowen}.” Smiley, 517 U.S. at 744 n.3.

This Court rejected the argument because there

had been no agency guidance as to the meaning of

the statute when the regulated conduct occurred. 7d.

(“Where ... a court is addressing transactions that

occurred at a time when there was no clear agency

guidance, it would be absurd to ignore the agency’s

current authoritative pronouncement of what the

statute means.”). The Court noted, however, that

Bowen’s presumption against retroactivity might

have been in play had the agency announced a

contrary interpretation contemporaneous with the

regulated conduct. Jd. (“There might be substance to

this point if the regulation replaced a prior agency

interpretation — which, as we have discussed, it did

not.”). See also Long Island Care at Home, Ltd. v.

Coke, 551 U.S. 158, 127 S. Ct. 2339, 2349 (2007)

(“[W]je concede that the Department may have

interpreted these regulations differently at different

times in their history. ... But as long as interpretive

changes create no unfair surprise — and the

Department’s recourse to notice-and-comment

rulemaking in an attempt to codify its new

interpretation ... makes any such surprise unlikely

here — the change in interpretation alone presents

no separate ground for’ disregarding the

Department’s present interpretation.”) (citing Bowen,

488 U.S. at 212).

MM%S’s attempt to rewrite the rules after the

game has ended presents the scenario described in

Smiley. Although Petitioner complained _ of

retroactivity in the questions presented in its

appellate brief, the court of appeals did not address

the problem of administrative retroactivity, and the

decision below failed to account for Petitioner’s

justifiable reliance on the agency’s interpretation of

its own regulation. See Landgraf, 511 U.S. at 265

(“Elementary considerations of fairness dictate. that

individuals should have an opportunity to know

what the law is and to conform their conduct

accordingly; settled expectations should not be

lightly disrupted.”); cf. FCC v. Fox Television

Stations, Inc., No. 07-582, slip op. at 11-12 (U.S. Apr.

28, 2009) (noting that an agency must “provide a

more detailed justification ... when its prior policy

has engendered serious reliance interests that must

be taken into account’).

The decision below was thus at odds with this

Court’s retroactivity precedent, and review is

warranted for this reason. “The largest category of

cases in which we have applied the presumption

against statutory retroactivity has involved new

provisions affecting contractual or property rights,

matters in which predictability and stability are of

prime importance.” Landgraf, 511 U.S. at 271. That

is precisely the case here.

CONCLUSION

The petition for a writ of certiorari should be

granted.

Respectfully submitted,